Thursday, June 14, 2007

Ron Conway on Entrepreneurs Cashing Out with Venture Financing

VentureBeat reports that Ron Conway is upset about Entrepreneurs taking cash bonuses when they raise rounds from VCs. Mr. Conway argues that all of the capital should stay inside the startup and be used to grow the company as quickly as possible, that entrepreneurs and investors should make money together when the company exists and that lesser know VCs are using these bonuses to steal deals away from KP and Sequoia.

Philosophically, I agree with Mr. Conway that capital's efficiency should always be maximized. However, in practice entrepreneur and investor interests do not always line up because most VC business models necessitate that they shoot for large wins and balance risk through out their portfolios. Take 10 big swings and hope to hit a couple out of the park. On the other hand entrepreneurs have all of their risk in one company and might prefer a garaunteed double instead of a risky home run. Thus, I am tempted to suggest that letting entrepreneurs cash-out a couple of million bucks would be a good way for both parties aim for the fences every time.

The problem with this approach is balancing motivation with financial need. There are some entrepreneurs who could stay focused, but a couple million bucks is a life changing event for most and could easily be a major distraction. On the other hand bootstrapping entrepreneurs in financial need would undoubtedly be more focused if they didn't have to worry about their creditors.

I suggest a hybrid solution... let entrepreneurs cash out, but not more than $250K. This is plenty of cash to do at least one of the following:
  • Pay for a wedding
  • Comfortably start a family
  • Make a down payment on a modest home in a nice neighborhood
  • Pay off debts used to self-fund
  • Buy a Porsche
$250K should be enough to give the entrepreneurs a bit of breathing room and have a bit of fun, without being so much money that it becomes a distraction.


At June 16, 2007 9:53 PM, Blogger Jimmy Su said...

Which round of VC funding do these cash outs typically occur? Thanks.

At June 17, 2007 11:53 AM, Blogger Andrew Fife said...

I don't think cashing out is about the round/stage of funding and I don't think it is a common occurrence at all. When VCs do cash out an entrepreneur I believe the determining factor is competition amongst investors.

At June 22, 2007 8:39 AM, Anonymous Roger Anderson said...

Some of this cash going out is actually to pay someone who raised the money - as a finder's fee. Often this fee will be renegotiated as stock or options to keep the cash in the company.

Andrew - my question while reading this very accurate and interesting post was, How many "other hands" do you have? :)

At June 22, 2007 10:18 AM, Blogger Andrew Fife said...


I'm note entirely sure what you are asking, but I'm happy to respond if you can clarify.



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